Aramark (ARMK) 2012 Q2 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the ARAMARK Corporation second quarter 2012 earnings conference. At this time I would like to inform you that this conference he is being recorded for rebroadcast and that all participants are in a listen-only mode. At the request of the Company we will open the conference up for questions after the presentation. I will now turn the call over to Chris Holland, Senior Vice President, -- Vice -- excuse me Finance Treasurer. Please proceed, Chris.

Thank you, Kim. And welcome everyone to ARAMARK Corporation's conference call to review the results of our operations for the second quarter of fiscal 2012. Here with me today are Joe Neubauer our Chairman, and Fred Sutherland our Executive Vice-President and Chief Financial Officer. Fred and I will present an overview of our second quarter and year-to-date results and business operations after which Joe will provide a few closing comments. There will be an opportunity for phone-in participants to ask questions following Joe's remarks. I would like to remind you that any recording or other use may not be done without the prior written consent of ARAMARK.

As we discuss the results you may want to refer to the Form 10-Q we filed earlier today which contains our second quarter and year-to-date results for fiscal 2012. This Form 10-Q can be found on our website at www.aramark.com. In today's discussion of results we mention certain non-GAAP financial measures. The Form 10-Q as well as schedules we posted to our website prior to the call include reconciliations of these non-GAAP financial measures to the most comparable GAAP measures as required by SEC rules.

Our discussion of operating income during today's call will in each instance exclude the incremental and tangible amortization and property and equipment depreciation expense resulting from the going private transaction and the impact of stock option expense. All of these items are detailed in the schedules posted to our website before the call. In addition, the prior-year period results have been restated to present the results of the Galls business as a discontinued operation as we sold it in the fourth quarter of fiscal 2011.

Various remarks that we may in this call relating to matters that are not historical facts, including remarks about future expectations, anticipation, beliefs, estimates, plans, and prospects constitute forward-looking statements. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors including those discussed in the Risk Factors MD&Aand other sections of the Form 10-K and the Form 10-Q filed earlier today. We disclaim any duty to update or revise such forward-looking statements whether as a result of future events or otherwise. Now let me turn the program over to Fred.

Good afternoon and thank you for joining us for our second quarter 2012 results call. I would like to review our business and operating results and then have Chris cover a few additional details on our performance. We're pleased to report results for our second fiscal quarter that further extends the trend of solid operating performance that we have seen in recent quarters. While the economic environment remains a bit uncertain we believe that our focus on initiatives and investments that position ARAMARK for long-term growth have contributed to our strong results for the quarter while continuing to build a solid foundation for the future.

Overall our performance in the quarter was balanced, as our less cyclical businesses delivered another quarter of solid results and our more economically sensitive businesses continue to show signs of improvement. While higher commodity costs remained a headwind for us in the quarter the impact on a year-over-year basis has been moderating. Our ongoing efforts to improve our operating efficiencies continue to allow us to leverage our top line sales growth into solid earnings performance.

Now, turning to our overall results for the second quarter. We reported sales of $3.3 billion up 4% on a reported basis and an organic basis. Adjusted operating income of $177 million was up 8% from the prior year level. For the first half of 2012 sales grew by 4% to $6.8 billion and were up 3% organically.

As we discussed in our first quarter results, growth in half was reduced somewhat by the impact of the first quarter -- in the first quarter of the NBA lockout and by our serving of the Asian games in last year's first quarter. Our first half adjusted operating income increased by 5% to $388 million but also as we discussed last quarter, operating income growth was negatively affected by approximately $4 million of planned acquisition-related transition and integration expenses that were absorbed in the first quarter, as well as the recognition last year of approximately $8 million of income related to a compensation agreement signed with the National Park Service under which they paid down a portion of our possessed reinterest and one of our concession contracts. So without these two particular items year-over-year profit growth for the first half would have been in the high single-digits.

In our North American food and support services segment, second quarter sales of $2.3 billion were up 6% on a reported basis and 4% on an organic basis but primarily by strong growth in our higher education business and health care and S&E sectors. For the first half reported sales of $4.7 billion were up 6% versus the prior year and up 4% organically. Overall sales performance for the first half was led by solid growth in higher education and health care.

Our business and industry sector reported a mid-single digit sales increase in the quarter and high single-digit sales increase for the half reflecting the positive impact from the Filterfresh office coffee services acquisitionwhich closed in October 2011. The sector also benefited from solid based and new business growth in our facility services business and in our refreshment services business. Sales in our education sector were up mid-single digits for the quarter and for the year-to-date led primarily by continued strong base and new business growth in our higher education food business as well as solid growth in our K-12 food business.

In the health care sector sales grew in the high single-digits for the quarter and for the year-to-date driven primarily by the acquisition of Masterplan within our health care technologies business in March 2011 as well as solid-based business growth. Sports and entertainment sales grew in the mid-single digits in the quarter led by solid attendance and positive per capita spending trends in both our NHL and NBA venues. For the year-to-date sales growth was limited to the low single-digit as result, as I mentioned, of the NBA lockout during the first quarter as well as the impact of fewer Major League Baseball play off games in October versus last year, in those stadiums where we provide our services.

Adjusted operating income in the North American food and support services segment was up 11% in the quarter to $130 million, nearly all segments contributed to profit growth in the quarter led by strong contributions from higher education and health care. In the first half segment adjusted operating income grew by 4% to $285 million. As previously noted results in the first quarter were negatively affected by approximately $4 million of planned transition and integration expenses. For the Filterfresh acquisition. In addition, results for the first quarter of 2011 included approximately $8 million of other income related to the compensation agreement with the National Park Service that I mentioned earlier. Excluding these two particular items, growth for the first half would have been in the high single-digits.

Now turning to the international food and support services segment, second quarter reported sales of $672 million were down slightly on a reported basis but up 4% organically versus the year-ago quarter. Organic growth in the quarter was led by strong performance in Germany, South America and China. For the first half reported sales in international were up 1% and up 5% organically. For the first half sales growth also was driven by strong results in Germany, Spain, South America and also Ireland. Second quarter adjusted operating income for international of $25 million was up 10% versus the prior year.

Results in the second quarter of 2011 you may recall benefited from a gain on the sale of a small mine core subsidiary in Chile, and the receipt of VAT income in the UK partially offset by severance charges in Chile related to the divestiture and a rate down of good will in India. Excluding these items from the prior year, profit growth would have been even stronger in the quarter, led by solid performance in Germany, Spain and Chile, partially offset by a profit decline in our AIM joint venture in Japan. For the first half, adjusted operating income was $48 million, up from $38 million in the prior year. In addition to the items I just mentioned 2011 results also included expenses related to efficiency and cost reduction initiatives, including severance charges across several of our countries in the first quarter of 2011.

While a smaller amount of expense was recorded in the first half of 2012 for further cost reduction and efficiency. Excluding these expenses in both years the segment would have still experienced strong income growth in the first half. In our uniform and career apparel segment, second quarter sales of $337 million were up 2% on a reported and organic basis. Improving organic growth rates in the uniform rental business for the quarter were offset by softness in direct sales, partly reflecting large customer direct sale programs that were launched in the first half of 2011 and have not been repeated in 2012. For the year-to-date sales of $678 million were about flat as compared to the same period as in the prior year on both as reported and organic basis.

We are continuing to invest in additional rental sales personnel resources to support accelerated new sales growth while maintaining a disciplined approach to contract pricing. We are gaining improved traction in our new sales efforts and during the second quarter and in the first half the volume of new sales delivered by our sales force significantly exceeded the prior year's resultsdriven both by higher sales force head count and higher sales rep productivity. The increased costs including installation costs associated with substantially higher levels of new business are largely being offset by the successful efficiency initiatives that we have discussed in previous calls. While higher cost related to the increased rates of new sales will continue to depress profit growth over the next few quarters we believe these efforts will lead to both improving rentals sales and profit growth it as we move through 2012 and into 2013.

The segment's second quarter adjusted operating income was $30.3 million down from $32.7 million the prior-year quarter primarily reflecting the incremental expense from our investment and growing a sales force, higher garment and installation costs from the acceleration of new business and the impact of higher energy costs. For the first half adjusted operating income was $70 million, down from $74.8 million in the prior year's first half reflecting all of the items that I just mentioned as well as severance expense incurred in the first quarter associated with some additional organizational efficiency initiatives following a successful integration of our rental and direct sales operations in the completion of the Galls divestiture.

Corporate expenses excluding the items Chris mentioned earlier were $7.5 million in the quarter compared to $8.2 million in the year-ago quarter. The first half expenses were $14.6 million compared to $16.5 million in the prior year.

Finally, on a personal note I would like to thank Chris Holland for his eight years of dedicated service as a key member of our finance team. While we all hate to see him go we recognize it's a terrific opportunity to be CFO of a very highly respected Fortune 500 company, and particularly one located in the same geographical area. It's just too good an opportunity to turn down. We at ARAMARK share in his success, we feel that Chris represented very good solid raw material when we brought him here and he was trained well. And so we're very proud of him.

We're also pleased to elevate Karen Wallace to VP and Treasurer. I know many of you on the call know Karen. Karen has worked side-by-side with Chris for the last seven years on all of our financing and she's well-positioned to fill some pretty big shoes that were worn by Chris. So at this point let me turn it back over to Chris for some additional details on the quarter and on the half.

Thanks very much, Fred, for that comment. I greatly appreciate it. I would like to now spend a few minutes on our financing capital structure and cash flow. Our adjusted EBITDA for the trailing 12-months ending March 30th, was $1.136 billion, up from $1.129 billion at December 30th, 2011 and up from $1.1 billion even at September 30th, 2011.

Interest and other financing costs were $119 million for the second quarter compared to $93 million in the prior year. The results for the quarter included approximately $11 million of expenses related to the term loan extension we completed in March. We are very appreciative of the broad support that the extension transaction received from many of you, our investors, and we believe that the success of the extension further enhances our financial and capital structure flexibility. Also contributing to the year-over-year variance was a recognition in the second quarter of 2011 of interest income of approximately $14 million related to the settlement of UK VAT claims from prior years.

For the first half interest and other financing costs were $227 million compared to $202 million in the prior year primarily reflecting the two items just mentioned. Including the impact of interest rate hedges approximately 50% of our debt portfolio is at fixed interest rates and our overall weighted average cost of debt is approximately 5.2%. Total reported debt at the end of the second quarter was $5.817 billion as compared to $5.739 billion at the end of the last year's second quarter.

Our secured debt as defined in our credit agreement totalled $3.733 billion including the term loan balance of $3.291 billion and a revolver balance of $173 million. Our Accounts Receivable securitization facility had $224 million utilized at the quarter's end. We continue to enjoy a strong liquidity position overall and at quarter end had approximately $473 million of available borrowing capacity under our $665 million revolving credit facility and $101 million of balance sheet cash.

Based on our trailing adjusted EBITDA our secured debt ratio improved to 3.22 times as of March 30th, as compared to 3.33 times as of December 30th 2011 and also 3.33 times as of April 1st, 2011. Net capital expenditures for the quarter were $71 million compared to $66 million in the prior year quarter.

For the year-to-date net capital expenditures totalled $145 million, up from $120 million last year as we make appropriate and prudent investments in our physical system infrastructure and in support of growth. As expected and consistent with historical patterns, working capital was the use of cash for us during the first half of our fiscal year. While summary investment and working capital is required a certain sectors and countries in particular the improved levels of sales growth we will continue to maintain a shop focus on working capital management as we move through the balance of the fiscal 2012. For the year-to-date we have spent a total of $150 on acquisitions compared to $155 million in the prior-year period.

This year's spending as you know relates primarily to the acquisition of Filterfresh on the first day of the fiscal year. We do continue to evaluate strategic investment opportunities in certain sectors and geographies but as we do so we will maintain a prudent and disciplined approach in pursuit of these opportunities. Now let me turn the call over to Joe Neubauer.

Thank you, Chris, and again my personal congratulations to you on your new assignment. As you heard from Fred and Chris, we're coming off a very solid quarter and truly gaining both top line and bottom-line momentum in our businesses. A systematic focus on growth in our key operational processes is beginning to pay off and we look for steady and continuing progress over the next several years. In the way of transition I am sure you have all heard -- aware by now that after nearly 30 years as CEO of ARAMARK, I will be turning these responsibilities over -- I actually have turned them over to Eric Foss.

I will remain as Chairman, involved in the business and clearly continue to be a significant investor in ARAMARK as I have been since our original going private transaction way back in 1984. Eric is an outstanding leader with a solid track record of performance in global enterprises. Most recently Eric was CEO of Pepsi Beverages Company, the $20 billion division of PepsiCo with over 80,000 employees operating in various countries. Prior to the acquisition of Pepsi bottling group by PepsiCo this was one of the two acquisitions that they had made of the bottling business, Eric was the Chairman and CEO of the larger one, Pepsi Bottling Group, an independent, publicly owned company with revenues of about $13 billion and operating in about 25 countries. I'm very proud of the solid management team that we have built here at ARAMARK.

Under Eric's leadership along with Fred and Lynn McKee our EVP of Human Resources, and the rest of our talented executive team I am certain that ARAMARK will continue to achieve very high levels of success. I want to personally thank you for your continued support of ARAMARK and assure you that our team will continue to work diligently to earn your confidence and to make this great company even more successful. Thank you.

Operator, you can open the lines up for questions now. Thank you.

Thank you. (Operator Instructions). And we'll pause for just a moment. Our first question comes from Jordan Hughes from Goldman Sachs.

Hi. Good afternoon. I saw in your Q that it looked like you plan to repay the 5% notes just with your revolver. Can you tell us what you're thinking with regard to 8.5% notes and the floating rate notes that are due in 2015?

Sure, Jordan. Yes. As we said for some time the intention was to repay those with revolver and free cash flow as we work through the second half the fiscal year. We haven't made any decisions with respect to the 8.5%s nor with the floaters at this point in time, but as you can imagine we will continue to evaluate the capital structure as we move forward and make an appropriate decision about each of those on a timeline that makes sense for us.

Okay. Thank you. And then it looked like you noticed some weakness in the international segment in the UK. Can you talk a little bit about what may have caused that?

This is Fred. The UK continues to be a very challenging market, we believe not only for us but for the other major companies operating in the food and facilities business in that market and we're actually have improved our earnings in the UK year-over-year, but as we talked about in earlier calls, we did have a few account losses last year and that -- those carry-in losses have had a negative impact on our sales this year. But actually operationally we've improved the operations in the UK quite a bit but now we're looking forward to getting the UK business back on the growth track.

Okay. Great. And in Japan you mentioned that AIM had a gross dollar decline, and not a ton but just about $1 million, and then gross margin rate was down about 130 basis points. What caused the weakness there? Or I guess the year-over-year decline.

As you recall about a year ago the terrible earth quake and tsunami hit Japan and so the country overall is -- continues to be impacted by much higher commodity costs driven by some of the -- the poison-related issues and the food shortage issues as well as a number of the energy restrictions that the government is placing on business. So day parts are shorter, workdays are shorter, food costs are higher. I think the team is doing a great job in a challenging environment but we're feeling the effects of the fact that the environment is very different than it was in the preceding quarter a year ago.

Okay. And lastly just on CapEx what CapEx are you looking at for the fiscal year?

I think what we said on the first calm of calls this year we won't give you a number, but as we with said, we're continuing to make investments in our systems' infrastructure at a bit of a higher rate than we had historically, and with the uniform business back on the growth curve we are reinvesting in that business in a more typical fashion. So CapEx will be higher than prior year and I think you saw that in the first half and that's something that you should continue to expect to see in the second half.

Okay. Thank you very much.

You're welcome.

And moving on we'll hear from Brian Hunt with Wells Fargo.

Thank you. Good afternoon Chris, I wish you best of luck and I was wondering most importantly when will the Bard employees start wearing uniforms and who supplies their cafeteria?

We're going to have -- it's Fred. We're going to have those discussions right after we hang up. I know that they have lots of uniformed employees but pharmaceutical companies have big margins. They can certainly afford an on-site cafeteria.

I'm already ahead of you, Brian. ARAMARK does the food service there for Bard and I do understand there is -- there is a uniform opportunity I think a company in Cincinnati might currently have it. So we'll see.

We'll be -- we'll be price competitive.

Seriously best of luck. First question is when you look at your -- your European operations overall, did you notice a difference in the sales momentum particularly in the southern part of the -- of the done continent and can you just talk about the overall momentum in Europe?

I think we would say our outlook for Europe is guarded. Our southern exposure, if you will, is limited to Spain. Spain has as you know is 20% plus unemployment rate, but our business in Spain is mostly focused in education and health care and so we have right now I think mid-single digit top line growth in Spain so we're satisfied with that. I mentioned the UK. Germany had a mid-single digit growth rate in the quarter. They had -- so they're performing well both top and bottom-line, and Ireland while not seeing robust growth is certainly performing better than it did last year. And those were our key countries in Europe.

Is your retention rate in Europe holding up in line with the corporate high 90% level?

Yes. Traditionally our international retention rate has been a little bit lower, but our year-to-date retention in international is consistent with our overall targets.

Okay. Great. And if I look at -- a lot of companies -- I have mentioned on this overall packaged food side but there seem to be a lot fewer weather events which caused school closures this year to track from food at home and led to more food away from home. Did weather contribute at all to your -- or the lack of weather events contribute at all to growth in your education business.

No. I wouldn't -- I wouldn't say so (multiple speakers). I wouldn't say so.

Okay and then when you look at the acquisition environment, I mean you are multiples pretty consistent with public multiples, and can you talk about the number of items crossing the transom? Are you getting more companies to look at than maybe a year ago?

I would say the pace of opportunities is pretty standard -- pretty consistent with what it was a year ago and the valuations are also pretty consistent. We certainly haven't seen any big uptick. You expect often the valuations of a function of how unique the particular company's position is and what the potential synergies are on the part of on a acquirer. But outside of that I don't think it's really changed much in the last 12 months.

Because you have to plan your -- your convention business can you talk about what the convention business looks like in bookings this year relative to a year ago or maybe even relative to the last couple of quarters?

Yes. I think it's -- it's pretty comparable, Bryan. It is because we operate some very large buildings. They can actually year- to-year be impacted by the just the fact that some of these huge shows rotate around the country and so you can have noise year-to-year because the huge electronics show was in one of our venues this year and it just isn't the next year. And so if you strip that out, the business has been I think pretty stable now here for the last 24 to 36 months, frankly.

And then you've got the Olympics coming up in London. Is there a number you can throw around the potential revenue impact? I know it's usually not a big margin contributor at the end of the day, but can you give us an ready of what type of numerical impact it can have on revenues ?

Yes. I think certainly to the overall company it's immaterial. It's the in the $50 million range on the top line and I think as we have talked historically we don't -- we don't do these to make a lot of money. It's a hugely complex operation that we're very proud of and have a great track record in doing. It's a great way to note invite our teams and a great accomplishment for the Company overall, but as a financial event per se certainly for the Company it's relatively immaterial.

And one more question. When you look -- coming out of fiscal 2011 to fiscal 2012 I think a round lot number was that you all had booked incremental business that could contribute roughly $1 billion worth of revenues. Is that run rate of new bookings changed at all?

Well, we don't typically -- I don't think we've disclosed the run rate of new business in the past. I mean what I can -- what I can tell you, though, is that the annualized run rate -- the annualized sales of new business signed year-to-date this year is ahead of last year by double digits. So -- so we're feeling pretty good about that. The new -- the value that annualized sales [and such] with new contracts signed up is up year-to-date versus last year, and lost business is actually down year-to-date versus last year.

And is that mix of business mostly health care and education like it's been in the last couple of quarters?

Well, it's did shall it's an important part of it, but it's -- it's spread around.

Okay. Well, I will let someone else ask some questions. Thank you for your time.

You're welcome, Bryan.

Our next question today is from Reza Vahabzadeh from Barclays.

Good afternoon. Can you bring us up to date on your initiatives around operating efficiencies if you've achieved a higher run rate here in your March quarter what your targets might be directionally for the balance of the year and the next couple of years what -- what steps are being rolled out? I know you have talked about it in the last couple of quarters, but it seams like a sizeable opportunity.

We're looking for 20, 30 basis points annual improvement in the margin across the businesses we've -- on a comparable basis achieved that in the second quarter. We're hopeful we can continue to achieve that during the year and we're fairly optimistic that we will be able to continue to achieve that sort of year-over-year performance for the next couple of years. The initiatives are the same related to the major cost drivers of the business, food and labor in the food and facilities business and -- and labor/plant costs and merchandise amortization route costs in the uniform business. And we continue to get traction through those initiatives, particularly in the uniform business as you saw our earnings were down slightly year-over-year, but that's in the face of significantly -- as I mentioned, significantly higher cost of installation, amortization associated with new merchandise being put in service and -- and higher fuel costs which were up pretty significantly year-over-year so what's offsetting that is significant improvement in the other operating costs through those efficiency initiatives so we feel pretty good about it.

And the 20 to 30 basis points that's -- that's company wide and is it about the same in each of the major segments or is there a bigger opportunity in the USFS because it's a larger business so bigger pool of costs?

I have to be careful since I have oversight responsibility for the uniform business and the Chairman is sitting here. As we talk about where the margin improvement is going to be, I have a -- I have -- I'm in a conflict here, but having said that, between -- I think it's fair to say between the domestic and international food and facilities business we have similar expectations. On the one hands the initiatives are further along in North America, on the other hands the margins are somewhat lower in international and we're working on some things to try to get better scale across countries which is not so much an opportunity in the US because we -- it's essentially one business. In the uniform business we expect better margin improvement than in the food and facilities business if you think about the margin is about double and our -- our long-term target in the uniform business is to have more like 50 basis points plus improvement.

You're not (multiple speakers) because the Chairman is there, right?

No. No. It's being recorded and it's going to be on the website so I realize that I can't be that flippant about it.

But in general I would say that on the food support side it's proportional to our volumes throughout the world. Clear in North America is the biggest part that we have and you would expect the most improvement there. And as Fred says because the uniform business is a higher margin business you would expect improvements to be significantly higher there. So it's proportionate to both the sales and the margin.

Sure. And then as far as the tone of business overall, especially in your US business, was the tone of business about the same from your perspective? The reported numbers look about the same to us, but from where you're sitting, is the tone of business about the same, improving, weakening, choppy?

Honestly I would say about the same. About the same. Not a big plus, not a big minus. About the same.

I suppose Europe may have softened a bit.

Maybe marginally towards the end of the quarter. It's a concern just from all of the goings on there with -- with a couple of the key economies and the financial system. So it's certainly something that we're concerned about. Frankly there's not a lot we can do about it but to be frank we're concerned about it.

All right. You mentioned the scale that you have in the US businesses. Are there some segments in the US or other businesses that you can square out to acquisitions, improve scale or actually get some scale to get the efficiency that you are achieving? And are there increased activity as far as potential targets that would be of interest to you?

Well, the acquisitions in North America would be driven more by a combination of wanting to strategically build out that portion of the business to strengthen a particular service, major service line, or to achieve attractive synergy associated with a combination.

All right.

So it's not that the acquisitions themselves apart from the synergies -- operational synergy don't scale -- driving more scale in North America in general. Is not a big benefit for us. It would be more specific synergies related to that acquisition through the combination of the two companies.

Right. Got it. And then just a couple of housekeeping items. The organic sales growth for the -- your USFS business and international business was -- was what? I was not sure about that.

4%.

4% US and international was?

4%. Both of them.

Okay. Got it. Chris, all the best wishes and stay in touch.

Thanks, Reza.

Take care.

You too.

(Operator Instructions). Our next question comes from Carla Casella from JPMorgan.

Hi. Great numbers. I just had one housekeeping item and then one -- most of my questions have been answered but the housekeeping item is can you just give us the amount of capital leases in the quarter and I do have one question as well.

Capital -- on the balance sheet?

Yes.

$45 million, I think. The number is pretty -- pretty consistent quarter-to-quarter, year-to-year.

Okay. Great. And then you talked about that your environment in Europe during the quarter. Can you just comment at all on whether you have seen any change in the -- this month or late April?

To be fair I don't think we have seen any meaningful change over the last month.

Okay. Great. And best to Chris. Thanks a lot.

Thanks, Carla.

And that does conclude our question-and-answer session today. Chris, I will turn the conference back over to you for additional or closing remarks

Thanks, Kim. Before we wrap up I'd just like to add my own sincere thanks to Joe, Fred, Karen, and the entire ARAMARK family for their support over these last eight years. I couldn't be leaving the Company with any more respect, admiration, or confidence in ARAMARK and in the team. I would also like to thank you all of you on the phone for your for support. It's been a very enjoyable and rewarding experience working with many of you over the years and I wish each of you nothing but the best in the future. So with that hope you all have a great afternoon. Thank you.

And that does conclude our conference for today. Thank you all for your participation.